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Expansionary policies, except for Latam

May 5, 2015

As in previous months, most movements were on the expansionary side.

In April, monetary policy decisions were made in 22 of the 31 countries under our coverage. As in previous months, most movements were on the expansionary side. Russia, Thailand and Hungary cut their interest rates, while China and Sweden announced expansionary measures other than rate cuts (in China a reduction in reserve requirements, and in Sweden an expansion of its bond-purchasing program). Brazil continued to run counter to the global trend. It was the only country to announce an increase in its basic interest rates.

In the rest of Latin America, central banks have kept their monetary policy stable. However most have made clear that there is no room for further easing, and some have been discussing when the appropriate moment might be to start increasing interest rates.

The Copom raised the Selic rate again, by 50 bps, to 13.25%. The decision was unanimous, and in line with the market’s expectations, which had been adjusted after recent Copom members’ statements signaling that the tightening cycle would continue at the same pace.

The brief post-meeting statement was the same as for the last Copom meetings:

“Evaluating the macroeconomic scenario and inflation prospects, the Copom decided unanimously to raise the Selic rate by 50 bps to 13.25%, without bias.”

Still-elevated inflation was probably the reason behind the decision to keep the tightening cycle at the same pace. The readjustment of relative prices (exchange rate, regulated prices) continues to add pressure to inflation. In April, the IPCA-15 consumer inflation preview came out higher than market expectations (1.07%), with core prices increasing more than in the previous month. After the result, we increased our estimate for the full-month IPCA to 0.70% from 0.65%, with the twelve-month change hitting 8.16%.

By keeping the same post-meeting statement, the Copom may suggest that the tightening cycle would continue in its June meeting. In recent statements, the Copom members have been reinforcing its intention to bring the IPCA inflation to 4.5% by the end of 2016. For that to be achieved, an additional hike in the Selic rate could be necessary.

We believe that the weakening in economic activity will lead the Copom to end the tightening cycle shortly. We believe that economic activity will continue to weaken, and Brazil’s GDP performance in the second quarter will be the worst of the year. Recent labor-market figures, revealing a higher unemployment rate and slower wage growth, reinforce that scenario.

The recent appreciation of the exchange rate also tends to encourage the Copom to stop increasing the Selic rate. We expected the exchange rate to end 2015 at 3.10 reais per dollar, somewhat weaker than current levels, but stronger than March levels.

MEXICO: Fed’s Liftoff Is Key

As was widely expected, Mexico's central bank maintained the policy rate at 3% in April. In the press statement announcing the decision, the board mentioned that the balance of risks to activity is skewed downward but remained unchanged from the previous meeting. On inflation, the board’s tone remained benign, noting that the balance of risks for inflation also remains unchanged from March. Even so, the board once again made it clear that the Fed’s policy actions will be a determining factor in the tightening cycle in Mexico.

We expect the central bank to raise rates in September, together with the Fed. Governor Agustín Carstens recently mentioned that the board is open to all policy options, including raising rates before the Fed if volatility becomes excessive. While we acknowledge that heightened volatility could prompt the central bank to act ahead of the Fed's first hike, the negative output gap, the disappointing recovery and the low inflation increases the probability of a first rate hike in Mexico months after that of the Fed.

CHILE: Monetary Policy Decision: No hikes in the short-term

In its April Monetary Policy Meeting, the Central Bank of Chile held its reference interest rate at 3.0%, as expected by us and most market participants. The press statement announcing the decision and the minutes of the meeting did not signal rate movements, in spite of a tightening bias expressed in the latest inflation report, confirming that hikes are unlikely in the near term. More specifically, Governor Vergara has expressed that the monetary policy would likely start to normalize at yearend or early 2016

We still expect no rate moves during this year and 2016. In our view, as long as inflation continues to converge towards the target and growth remains below what the Central Bank considers as the potential, rate hikes are unlikely. On the other hand, we also think that if the next data shows that inflation will take longer to converge to the target than in the central bank’s scenario, the board may raise rates even before the end of this year.

COLOMBIA: No signs of rate moves

As widely expected, the central bank held the policy rate at 4.5% in its April monthly meeting. The decision was unanimous. Overall, the neutral tone was maintained in the statement.

In the press release announcing the decision, the board highlighted the acceleration in inflation and noted that the expectations for December 2015 are now sitting at 3.76% (3.65% last month). However, it also made reference to the stable yearend 2016 expectations, which are close to 3.0%. We believe this reiterates the board’s view that inflation will converge to the target in its forecast horizon, reaffirmed by the comment that inflation’s acceleration has been primarily due to transitory factors. Besides inflation expectations for the relevant policy horizon, the statement hints that the central bank is monitoring closely the evolution of the current-account deficit, which is now very wide.

We continue to expect the central bank to remain on hold for the remainder of this year and throughout 2016. The board is clearly unwilling to add stimulus to an economy running a wide current account deficit and with inflation above the upper-bound of the target. On the other hand, the probability of rate hikes remains subdued in an environment of weakening activity - we expect growth to reach 3.2% this year, down from 4.6% last year.

PERU: Easing bias removed

Peru’s central bank held the policy rate at 3.25%, as expected, in its April meeting. However, the board removed the easing bias in favor of a neutral tone. Previously, the board was explicit about the possibility of providing the economy with additional easing.

Even so, the central bank continues to implement additional monetary easing through lowering the reserve requirement for local currency. Towards the end of April the rate was lowered to 7.0% from 7.5%. Governor Velarde has previously indicated that the reserve requirement rate was near the operating limit for banks, implying that additional cuts would be less effective. Yet, since the Governor made those remarks, three 0.5 pp cuts have been implemented.

We continue to expect no further policy rate cuts this year or in 2016. Although a point can be made for further monetary stimulus given the economic slowdown, there are a number of reasons that will likely refrain the central bank from implementing additional cuts. Inflation remains at the upper end of the target range, exchange pressures continue and the capacity of the central bank to effectively intervene in the FX market is reduced (due to lower net reserves).